On Our Radar

On Our Radar

Another Bearish ETF Idea for a Trump Presidency

The SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the iShares U.S. Home Construction ETF (NYSEArca: ITB), the two largest homebuilders exchange traded funds, have been helped this year by the Federal Reserve’s lower for long policy on interest rates.

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While housing data has largely been supportive of upside for homebuilders stocks and ETFs this year, the Fed is not the only potential problem for this asset class. With Election Day drawing near, some market observers are concerned a victory by Republican contender Donald Trump could weigh on ITB and friends.

Some traders see the data as supportive of more gains for ITB, XHB and the ETFs’ holdings. ITB and XHB both include exposure to home products and retailers, along with their large homebuilders allocations. Specifically, ITB holds 63.8% homebuilding, 15.6% building products, 9.0% home improvement retail, 4.3% home furnishing, 2.5% trading companies & distributors, 2.2% specialty chemicals, 1.3% construction materials and 1.2% forest products. XHB has 33.4% building products, 29.4% homebuilding, 13.2% home furnishing, 9.8% home furnishing retail, 8.6% home improvement retail, 5.6% household appliances.

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The current low inventories has helped bolster property prices. The persistent low-rate environment has helped keep mortgage rates depressed and attract new home buyers. However, wage growth will be required to maintain a rising demand.

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In a higher rate environment, home affordability is diminished and there is less incentive for renters to purchase a new home. Additionally, the more expensive mortgage rates may scare away current homeowners who are thinking about upgrading to a bigger, more expensive home.

“Given positive technical expectations, divergent October price action will deserve our attention, especially if it points to greater than expected selling pressure. A breakout into the 30s will negate the bearish setup while a decline through the .618 retracement will tell us that short sellers are gaining the upper hand. Timing marks the biggest risk in this observational process because no one can predict how election momentum will unfold into November,” according to Investopedia.

“The Pew Hispanic Center, a non-partisan research group, based in Washington D.C., estimates that one in five illegal immigrants works in the construction industry. A Trump presidency is likely to put significant pressure on these market groups, including the homebuilders, offering profitable short sales,” adds Investopedia.